Classic Antitrust Cases: Will Congress Override Brooke Group, Matsushita, and Weyerhaeuser—and Resurrect Utah Pie?

by | Jan 7, 2021 | Antitrust

The U.S. House Judiciary Committee Majority Report of its Investigation into Digital Markets included a number of recommendations that went beyond digital markets, including overriding several classic antitrust cases.  One of the Report’s recommendations is to make it easier for plaintiffs to bring predatory pricing and buying monopolization cases by overriding the “recoupment prong” in Brooke GroupMatsushita, and Weyerhaeuser.  While such action would drastically alter monopolization law, it also might inadvertently revive another classic antitrust case, Utah Pie, and certain Robinson-Patman price discrimination claims long considered dead.

Predatory Pricing Under Brooke Group and Matsushita

Sherman Act Section 2 claims for monopolization can be lodged only against “monopolists” that are “monopolizing,” that is, acting in a way to maintain that monopoly.  There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing is pricing below some level of cost so as to eliminate competitors in the short run and reduce competition in the long run.  The Brooke Group Court established a two-part test for such claims:  ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.”

While the Report did not express any concerns about the “below an appropriate measure of costs” prong, its one example (Amazon’s pricing of diapers) just described the pricing as “below cost.”  Lower courts have developed a standard that finds prices “below an appropriate measure of costs” only if they are below some measure of the monopolist’s incremental costs, like average variable costs. It is not clear if the Report’s authors want to modify this prong as well.

Under the recoupment prong, a plaintiff must show that the monopolist has the capability to drive out the plaintiff and other competitors plus keep them (and other potential competitors) out so it can later raise prices and “recoup” its losses.  Such a showing requires an analysis of the relative strengths of the competitors and the attributes of the market, such as high entry barriers.

The Brooke Group test has been difficult for predatory pricing plaintiffs to meet — as the Supreme Court intended, for two reasons.  First, the Court thought it would be difficult for courts to distinguish between competitive low prices and predatorily low ones.  Because “cutting prices in order to increase business is often the very essence of competition,” the Court was concerned that an easier test would deter low prices that benefit consumers.

Second, the Court had earlier in Matsushita expressed skepticism that such competitively harmful predatory pricing schemes occurred often:  “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”  As we covered in different prior posts, while Matsushita does concern predatory pricing, its holding is more concerned with the appropriate standard for summary judgment in any antitrust case; because the “consensus” quote has been repeated in nearly every predatory pricing case since Matsushita, however, the Report’s recommendation to override it makes sense.

Weyerhaeuser Extends Recoupment to Predatory Buying and Monopsony

More than a decade after Brooke Group, the Supreme Court in Weyerhaeuser extended its two-part test for predatory pricing by a sell-side monopolist to predatory buying (or overbidding) by a buy-side monopsonist.  There, the defendant allegedly purchased 65% of the logs in the region that were a necessary input for lumber.  Such alleged overbuying drove up the cost of the input while the price of lumber was going down.  These trends led plaintiff, a competing lumber mill, to shut down operations and sue.

The Weyerhaeuser Court saw numerous parallels between the alleged predatory buying and the alleged predatory pricing in Brooke Group, including an inability of any court to easily distinguish between anticompetitive and competitively neutral actions by the alleged monopolist.  Therefore, the Court adapted its two-part test from Brooke Group for use in predatory buying cases.

First, a plaintiff would need to show that a monopsonist defendant was selling its output below its costs of the monopsonized input, here logs, plus any other input and processing costs.  Second, the plaintiff would need to show that the monopsonist would be able to recoup its alleged losses from overbidding by driving out other current buyers and keeping enough current or potential bidders out of the input market so it could later reduce its bids and recoup its losses.  In Weyerhaeuser, the plaintiff conceded that it could not meet such a standard.

The result of the Court’s Brooke Group and Weyerhaeuser test (and the skepticism for such claims expressed forcefully in Matsushita) has been a drastic reduction in the number of predatory claims that get made or survive a motion to dismiss.  Overriding the recoupment portion of the test would dramatically increase the uncertainty that an alleged monopolist faces when making pricing decisions.  As a result, such companies likely will forego significant price cuts and will incur significant costs hiring legal and economic expertise to justify the ones they do make. Consumers certainly will be worse off without the lower prices, at least in the short run.

Robinson-Patman Rejuvenation?

An increase in predatory pricing claims under Sherman Act Section 2 might not be the only result of overriding the recoupment prong of Brooke Group.  Because the plaintiff in that case also made a primary line injury claim under Robinson-Patman Section 2(a) and the Court applied a nearly identical two-part test, overriding Brooke Group could rejuvenate some Robinson-Patman claims that have been effectively dead since 1993.

Robinson-Patman claims have fallen into disfavor in the last few decades, although private allegations and suits still arise each year.  A successful price discrimination claim now requires a plaintiff to show several elements, including some form of “injury to competition.”  Today, the usual suit claims a secondary line injury:  Manufacturer 1 sells the same commodity to Retailer A at price lower than the price to Retailer B and the disfavored buyer claims an injury to competition at the retailer level.

The Robinson-Patman claim in Brooke Group alleged a primary line injury:  Manufacturer 1’s lower prices to Retailer A harmed Manufacturer 2, usually because Manufacturer 2 could only sell to Retailer A and not Retailer B.  The Brooke Group Court treated this Robinson-Patman claim with the same skepticism as the Sherman Act predatory pricing claim and applied the same two-part test, including some form of recoupment.  The result has been many successful defendant motions to dismiss the few such claims that are made, often because recoupment was implausible.

Depending on how the overriding is phrased, the result in Robinson-Patman primary line claims could be a return to the Court’s standard in place before Brooke Group, embodied in 1967’s Utah Pie.  In that case, the plaintiff had entered the Salt Lake City frozen pie market with a new local plant, which lowered its costs and allowed it to lower its prices.  As a result, it gained over 60% of the market.  The existing competitors, all national brands with factories located elsewhere, responded by lowering their prices in Salt Lake City but not in other markets.  As a result of these actions, more than four times as many pies were sold in the market, plaintiff remained the market leader but with only a 45% share, and the plaintiff showed a profit every year.

The Court reinstated a jury verdict that each of the national defendants had violated Robinson-Patman by charging a lower price in Salt Lake City than in other markets.  The Court found that competitive injury could be inferred from proof of predatory intent which, in turn, could be demonstrated through direct evidence of subjective intent or inferred from “economic circumstances,” including persistent unprofitable sales below cost.

Utah Pie was interpreted to mean that a Robinson-Patman plaintiff’s need to show primary line injury to competition required demonstrating only a defendant’s intent to produce a declining price structure in the industry.  That result was severely criticized by commentators and lower courts.  As Judge Easterbrook put it in A.A. Poultry Farms v. Rose Acre Farms (881 F.2d 1396, 1404) in 1989, “Nary a voice has been heard in support of Utah Pie in years.”  As a result, lower courts struggled to follow the Court’s precedent while effectively applying a more objective standard suggested by commentators, including a standard akin to the one ultimately adopted by the Brooke Group Court.

If Congress overrides the recoupment prong of that standard, it is not clear what a Robinson-Patman plaintiff will have to prove to show primary line injury.  Just as with Sherman Act Section 2 predatory pricing claims, it is likely that any standard will be less objective and so increase the uncertainty that companies will face when lowering prices in potentially different markets.  Such a result almost certainly will require those companies to spend more time and money with old-time antitrust experts who remember Utah Pie and never completely forgot their Robinson-Patman advice.